Flood Insurance Program Under Fire ~

Flood Insurance Program Under Fire ~

As spring flood season approaches in Northeast coastal
regions, as well as in the upper Midwest, the National Flood
Insurance Program is coming under fire and, possibly, under the
Congressional budget axe.
After a series of stopgap measures to fund the program for a
few months at a time, Congress last year voted to fund the NFIP
for a full year, through September 30, 2011. But with a new
Republican majority in the House, the program, long criticized
for its cost and fiscal unsoundness, is in fresh trouble.
Congresswoman Candice
Miller, Republican from Michigans 10th district, introduced
legislation to terminate the NFIP effective in December of
2013, and to end the Federal Emergency Management Agencys
authority to designate flood zones nationwide, according to a
report in the Insurance and Financial Adviser
(
Congress asked to end National Flood Insurance Program in
2013, by Bob Graham). Text of Representative Millers bill
is posted at the Library of Congress Thomas website
(H.R.435
-- National Flood Insurance Program Termination Act of
2010). In a statement on her website, Miller said, The
National Flood Insurance Program is a typical Washington
boondoggle with an endless bureaucracy overseeing
out-of-control spending
(
Miller: End the National Flood Insurance Program).
Like any Washington program, the NFIP has its constituency
in this case, the five million policyholders who have
subsidized insurance for flood damage (in fact, the only flood
insurance available in America), and the insurance agencies who
make money issuing policies and managing claims for the
program. But in a time of across-the-board belt-tightening,
opponents of the program will have plenty of ammunition. The
U.S. Government Accountability Office (GAO), a non-partisan
research agency of the Congress, reports that its analysis has
found weaknesses in NFIP management and operations, including
financial reporting processes and internal controls, and
oversight of contractors place the program at risk. GAO reports
on the program are archived at the
High Risks and Challenges page of the agencys website.
As described by GAO, the NFIP program is a classic example
of reverse Darwinism: the survival of the unfittest. Says
GAO:

While Congress and FEMA intended that NFIP be funded
with premiums collected from policyholders rather than with
tax dollars, the program is, by design, not actuarially
sound. NFIP cannot do some of the things that private
insurers do to manage their risks. For example, NFIP is not
structured to build a capital surplus, is likely unable to
purchase reinsurance to cover catastrophic losses, cannot
reject high-risk applicants, and is subject to statutory
limits on rate increases. In addition, its premium rates do
not reflect actual flood risk. For example, nearly one in
four property owners pay subsidized rates, full-risk rates
may not reflect the full risk of flooding, and NFIP allows
grandfathered rates that allow some property owners to
continue paying rates that do not reflect reassessments of
their properties' flood risk. Further, NFIP cannot deny
insurance on the basis of frequent losses and thus provides
policies for repetitive loss properties, which represent
only 1 percent of policies but account for 25 to 30 percent
of claims. NFIP's financial condition has improved slightly
due to an increase in the number of policyholders and
moderate flood losses, and since March 2009, FEMA has taken
some encouraging steps toward improving its financial
position, including making $600 million in payments to
Treasury without increasing its borrowings. However, it is
unlikely to pay off its full $18.8 billion debt, especially
if it faces catastrophic loss years. Operational and
management issues may also limit efforts to address NFIP's
financial challenges and meet program goals.

Only time will tell whether Millers proposal to scrap the
program entirely can pass both houses of Congress and gain the
Presidents signature. But given the anti-spending momentum on
Capitol Hill, the risk of NFIPs demise is one risk the
insurance industry is taking seriously. Said Ryan Young, senior
director of federal government affairs for the Independent
Insurance Agents & Brokers of America, A lot of
legislators will want to cut budgets, and that could put the
flood insurance program in a bad position.